The digital financial landscape in Kenya has seen a significant transformation with the rise of Digital Credit Providers (DCPs), which has brought about significant opportunities for financial inclusion and innovation.
Recognizing the importance of regulating this burgeoning sector, the Central Bank of Kenya (CBK) was vested with the authority to license and supervise DCPs under the Central Bank Act and supplementary Regulations published in March 2022. The intent behind these regulations was to ensure a structured and secure financial ecosystem, protecting consumers while fostering innovation. However, the implementation of the licensing process has proved challenging, leading to significant delays and frustrations among applicants.
Regulatory Framework and Current Licensing Status
The CBK is mandated under the Regulations to grant a licence to a DCP within 60 days of receiving a complete application, provided the applicant meets all stipulated requirements. This 60-day timeframe was intended to facilitate a swift and efficient process, encouraging the growth of the digital credit market. However, despite receiving over 500 applications since the publication of the Regulations, the CBK has issued only 51 licences to date, none within the stipulated 60-day period. This situation indicates a need for process improvements.
Challenges in the Licensing Process
1. Lengthy and Arduous Process: The application process has proven to be exceptionally lengthy and burdensome for many DCPs. Applicants have reported numerous queries from the CBK, often accompanied by prolonged response times. This back-and-forth has extended the process well beyond the intended 60 days, creating uncertainty and operational delays for DCPs.
2. Lack of Clear Guidelines: A significant factor contributing to the delays is the lack of detailed guidelines from the CBK on how applications are evaluated. This opacity has left many DCPs in the dark regarding the specific criteria and standards they need to meet, leading to frequent re- submissions and additional queries from the CBK.
3. Backlog of Applications: The cumbersome process and lack of transparency have resulted in a severe backlog of applications. With hundreds of applications pending and only 51 licences issued, the CBK is struggling to manage the volume, further exacerbating delays.
Impact on DCPs and the Broader Financial Ecosystem
The prolonged and opaque licensing process has had several adverse effects on DCPs and the broader financial ecosystem in Kenya:
1. Fundraising Challenges: For many DCPs, the delay in obtaining a licence has resulted in significant fundraising challenges. Investors are hesitant to commit funds to DCPs that lack regulatory approval, fearing potential legal and operational risks. This uncertainty has stymied the growth and expansion plans of many promising digital credit providers.
2. Operational Uncertainty: The extended licensing process has created operational uncertainties for DCPs. Without a clear understanding of the evaluation criteria and timelines, DCPs are unable to effectively plan and execute their business strategies. This uncertainty undermines their ability to innovate and compete in the rapidly evolving digital financial market.
3. Consumer Impact: The delays in licensing also have a ripple effect on consumers, who rely on digital credit services for quick and convenient access to funds. The slower rollout of licensed DCPs limits consumer choices and may push them towards unregulated and potentially exploitative credit providers.
Recommendations for Improvement
To address these challenges and streamline the licensing process, several steps can be taken:
1. Publication of Detailed Guidelines: The CBK should publish comprehensive guidelines detailing the specific requirements and evaluation criteria for DCP applications. This transparency will help applicants better prepare their submissions, reducing the back-and-forth queries and expediting the process.
2. Capacity Building: Investing in building CBK’s capacity to handle the high volume of applications more efficiently would be beneficial. This could involve hiring additional staff, implementing advanced processing systems and providing regular training to ensure a consistent and fair evaluation process.
3. Stakeholder Engagement: Regular engagement with DCPs and other stakeholders in the digital financial ecosystem can help the CBK gather feedback and continuously improve the licensing process. Open channels of communication will also foster a collaborative approach to regulation, benefiting both the CBK and the industry.
4. Adherence to Timelines: The CBK must strive to adhere to the 60-day licensing period stipulated in the Regulations. Implementing strict internal timelines and monitoring mechanisms can help ensure that applications are processed within the mandated timeframe.
5. Sandbox Approach: The CBK should consider applying a sandbox approach to licensing. Under this approach, licence applications would be approved within 60 days, but with conditions requiring the DCP to address any pending issues within a prescribed timeframe, for example, 12 months. Failure to address such issues may result in the CBK suspending or revoking the conditional licence. By adopting the sandbox approach, the CBK would also be giving itself time to engage the DCP sector, understand the risk issues, and develop practical and balanced guidelines to assist DCPs in submitting quality applications and maintaining ongoing compliance.
6. Shared Supervisory Mandate: The CBK should consider sharing the supervisory mandate with other regulatory agencies such as the Competition Authority of Kenya (CAK) and the Office of the Data Protection Commissioner (ODPC). Most complaints against DCPs relate to consumer protection issues, such as unconscionable debt collection practices, lack of transparency regarding product features such as fees, and violation of data privacy through misuse of contact addresses on mobile devices. By delegating conduct regulation to the CAK and the ODPC, the CBK can focus on the licensing aspect while ensuring that consumer protection and data privacy issues are adequately addressed. This collaboration would lead to a more comprehensive regulatory framework, enhancing consumer trust and market stability.
Conclusion
The regulation of digital credit providers is crucial for maintaining a secure and innovative financial ecosystem in Kenya and the CBK’s efforts in this regard are commendable. By addressing the issues of transparency, capacity, stakeholder engagement, adopting a sandbox approach, and sharing the supervisory mandate, the CBK can streamline the licensing process.
These measures will foster a more conducive environment for DCPs and ultimately benefit consumers and the broader economy.
